The Fiduciary Concept
A fiduciary relationship is one in which one party (the fiduciary) undertakes to act in the best interests of another (the beneficiary) in circumstances where the beneficiary is vulnerable to the fiduciary's exercise of discretion or power. The fiduciary's duty is one of undivided loyalty — they must subordinate their own interests to those of the beneficiary.
Fiduciary duty is an equitable concept developed by the courts of equity to protect persons who place confidence in others with power to affect their interests. The Supreme Court of Canada has consistently held that fiduciary duties arise from the specific nature of the relationship and not merely from the label given to it.
Categories of Fiduciary Relationship
Per Se Fiduciary Relationships
Some relationships are recognized as fiduciary per se — by virtue of their inherent nature, without requiring proof of the specific circumstances:
- Trustee and beneficiary — the paradigm fiduciary relationship;
- Solicitor and client — the lawyer owes undivided loyalty to the client;
- Director and corporation — directors owe fiduciary duties to the corporation under common law and the Canada Business Corporations Act / Ontario Business Corporations Act;
- Agent and principal — where the agent has authority to affect the principal's legal position;
- Partner and co-partner — partners are fiduciaries to each other in partnership matters;
- Guardian and ward — a guardian appointed for an incapable person.
Ad Hoc Fiduciary Duty: Hodgkinson v Simms
Outside the per se categories, fiduciary duties can arise in novel relationships where the facts satisfy the test stated by the Supreme Court of Canada inHodgkinson v Simms [1994] 3 SCR 377. A fiduciary duty arises ad hoc where:
- The alleged fiduciary has scope for the exercise of discretion or power;
- The alleged fiduciary can unilaterally exercise that discretion or power in a way that affects the beneficiary's legal or practical interests; and
- The beneficiary is peculiarly vulnerable to, or at the mercy of, the fiduciary holding the discretion or power.
The vulnerability element is critical. The beneficiary must lack the ability to self-protect — they must be dependent on the fiduciary's good faith in a way that goes beyond ordinary commercial dealings. In Hodgkinson, a financial adviser who gave tax-shelter investment advice to a client who relied entirely on the adviser's expertise, and who had an undisclosed conflict of interest, was held to owe a fiduciary duty to the client.
Arm's length commercial transactions negotiated between parties of equal bargaining power generally do not give rise to fiduciary duties — the mere fact that one party places trust in another does not create a fiduciary obligation. As the Supreme Court noted in Frame v Smith [1987] 2 SCR 99, not every relationship of trust and confidence is fiduciary.
Core Fiduciary Duties
Duty of Loyalty
The duty of loyalty requires the fiduciary to act exclusively in the interests of the beneficiary in matters within the scope of the fiduciary relationship. The fiduciary must not prefer their own interests or the interests of third parties over those of the beneficiary. This duty continues even after the termination of the formal relationship, in respect of matters arising during the relationship.
Duty to Avoid Conflicts of Interest
A fiduciary must not place themselves in a position where their personal interest (or the interest of a third party) conflicts with their duty to the beneficiary, without full disclosure and informed consent. The rule is prophylactic — the fiduciary must avoid the conflict of interest, not merely resolve it in the beneficiary's favour after the fact.
A fiduciary who acts in a conflict of interest situation without disclosure is liable for breach of fiduciary duty even if the beneficiary suffered no loss — the gain made by the fiduciary is held on constructive trust.
Duty Not to Profit
A fiduciary must not make a secret profit from the fiduciary position. Any profit — commission, gift, kickback, or benefit — received by the fiduciary in connection with the fiduciary relationship without the beneficiary's knowledge and consent is held on constructive trust for the beneficiary. The seminal case is Boardman v Phipps[1967] 2 AC 46, in which a solicitor who used information from a trust to acquire shares was required to account for the profit even though the trust also profited.
Duty of Good Faith
The fiduciary must act in good faith — honestly, transparently, and for proper purposes. A fiduciary who exercises power for an improper purpose (even if technically within the scope of their authority) acts in breach of fiduciary duty.
Fiduciary Duties in Professional Relationships
Solicitor-Client Fiduciary Duty
A lawyer owes fiduciary duties to the client: undivided loyalty, avoidance of conflicts of interest, confidentiality of privileged information, and candid advice. The Law Society of Ontario's Rules of Professional Conduct codify many of these obligations. A lawyer who acts for conflicting interests without proper consent, or who uses client information for personal gain, breaches both professional conduct rules and fiduciary duty.
Director and Officer Fiduciary Duty
Directors and officers of Ontario corporations owe fiduciary duties to the corporation under the Ontario Business Corporations Act(OBCA) s.134: they must act honestly and in good faith with a view to the best interests of the corporation. The corporate opportunity doctrine requires directors and officers to bring corporate opportunities to the corporation before exploiting them personally.
Agent Fiduciary Duty
An agent who has authority to act on a principal's behalf owes the principal fiduciary duties of loyalty, no secret profit, and duty to account. Real estate agents, business brokers, and financial advisers in agency relationships are all subject to fiduciary obligations in connection with the agency.
Remedies for Breach of Fiduciary Duty
Constructive Trust
A constructive trust is imposed where a fiduciary holds property as a result of a breach of fiduciary duty. The beneficiary is treated as the equitable owner of the property — or a share of it in proportion to the gain attributable to the breach — giving priority over the fiduciary's other creditors. The constructive trust arises at the date of the breach, not at the date of judgment.
Accounting of Profits
An accounting of profits is a personal remedy requiring the fiduciary to disgorge all profits made from the breach of duty. Unlike damages, an accounting does not require proof of loss. The beneficiary is entitled to the profits actually made, not merely reasonable compensation.
Equitable Compensation
Equitable compensation compensates the beneficiary for losses caused by the breach of fiduciary duty. The standard for equitable compensation is more generous than common law damages: the loss need not be reasonably foreseeable if it flows directly from the breach, and the defendant bears the burden of proving that the loss was not caused by the breach. The Supreme Court of Canada confirmed this approach in Canson Enterprises Ltd v Boughton & Co [1991] 3 SCR 534.
Injunction
An injunction may be sought to prevent ongoing or threatened breach of fiduciary duty — particularly to restrain a former fiduciary from using confidential information or exploiting business opportunities that should have been brought to the beneficiary.
Practice Points for Ontario Lawyers
- Identify whether the relationship gives rise to fiduciary duty before advising on conflicts — per se categories (director, lawyer, agent) trigger full fiduciary obligations; ad hoc fiduciary duty requires vulnerability analysis under Hodgkinson v Simms.
- For corporate matters: directors must bring potential corporate opportunities to the board before pursuing them personally; failure to do so attracts both OBCA s.134 liability and breach of fiduciary duty.
- In solicitor-client matters: document informed consent to conflicts in writing before acting; verbal disclosure may be insufficient.
- The beneficiary may elect between the proprietary remedy (constructive trust over specific property) and the personal remedy (accounting or equitable compensation) — advise the client on which is more advantageous given the circumstances.
- Limitation periods: equitable claims for breach of fiduciary duty are subject to the two-year limitation period under the Limitations Act, 2002 from the date of discoverability, subject to equitable doctrines of laches and acquiescence.